How Will Student Loan Forgiveness Affect Defaulted BorrowersJuly 18, 2022
For millions of borrowers, their lives are about to get easier.
According to a survey done for the Pew Charitable Trusts, about one-third of federal student loan borrowers have defaulted on their loans in the past. Defaulting has serious consequences, including wage garnishment, and can ruin a borrower’s credit.
But thanks to a new initiative from the Biden administration, borrowers in default will get significant relief. With this student loan default forgiveness program, borrowers will get a fresh start when payments resume in September 2022.
What Is Student Loan Default?
When you miss a federal student loan payment, your account becomes delinquent. If you’re delinquent for 90 days or more, your loan servicer will report the delinquency to the major credit bureaus, which can damage your credit.
If you continue to be delinquent and don’t make your scheduled payments for 270 days or more, your account enters default.
Student loan default is a serious issue with substantial consequences, including:
- Loan acceleration: Your entire unpaid loan balance is due right away.
- Loss of eligibility for federal benefits: You can no longer take advantage of benefits like forbearance, deferment, or signing up for a new income-driven repayment (IDR) plan.
- Treasury offset: The government can seize your tax refund, Social Security benefits, and other federal benefit payments and apply that money to your unpaid loans.
- Wage garnishment: The government can require your employer to withhold a portion of your paycheck and send it to your loan servicer.
- Court costs: You could be taken to court, and you may be responsible for court costs, collection fees, attorney fees, and other expenses.
Student Loan Default Forgiveness
Typically, there are three ways to get out of default:
- Pay off the loan: If you have access to a lump sum of cash, you can pay off the entire balance. Once the loan is paid in full, the default ends, and you’ll no longer have to worry about wage garnishments or collection fees. This option is effective, but it’s not a realistic choice for most borrowers in default that likely have limited funds.
- Loan rehabilitation: With loan rehabilitation, you sign a written agreement with your loan servicer to make nine voluntary, reasonable, and affordable monthly payments within 20 days of the due date. You must make all nine payments within ten consecutive months. After that, your loans are no longer in default.
- Loan consolidation: Another approach is to consolidate your loans with a Direct Consolidation Loan. If you have defaulted loans, you must agree to repay the loans under an IDR plan or make three voluntary, on-time, full monthly payments on the defaulted loan before you can consolidate.
Getting out of default can be extremely difficult for borrowers struggling to pay their bills. Of the borrowers that default on their student loans, approximately two-thirds default multiple times.
But thanks to a new initiative, those borrowers may get some much-needed help. In April, the U.S. Department of Education announced that it extended the pandemic-related federal loan payment freeze through August 31, 2022. This extension was designed to give borrowers more time to prepare for repayment and reduce the risk of delinquency.
As part of this effort, the Department of Education said student loan borrowers in default would be given a “fresh start.” When payments resume in September, it will remove the default for affected borrowers, putting their accounts in good standing. Borrowers will resume repayment without worrying about collection calls, wage garnishments, or going to court.
What to Do Next
If you have federal student loans and were in default, your loans will be current when repayment resumes in September. The process is automatic; there’s nothing you need to do.
However, you should take the following actions now to avoid entering default again in the future:
- Update your contact information: If you have moved, gotten a new phone number, or opened a new email address over the past two or three years, make sure your loan servicers have the latest contact information.
- Explore forbearance or deferment options: If you’ve lost your job, are dealing with a major medical issue, or have another financial emergency, contact your loan servicer to find out if you’re eligible for a federal forbearance or deferment. If you qualify, you may be able to postpone your payments after the federal payment freeze ends.
- Enroll in an IDR plan: If you can’t afford your payments, apply for an IDR plan. IDR plans use longer loan terms and a percentage of your discretionary income to determine your payment amounts so that you can qualify for a much lower payment.
- Sign up for autopay: Avoid the risk of missing payments by enrolling in autopay. As an added benefit, federal loan servicers give borrowers a 0.25% percentage point discount to borrowers that sign up for automatic payments.
If you have private student loans, the federal student loan default forgiveness initiative doesn’t apply to you; if you’ve defaulted on your loans, your loans will still be in default. Contact your loan servicer to discuss your options. Or, if you are looking for ways to lower your interest rates and save money, consider student loan refinancing. Use the Find My Rate tool to view your loan options and interest rates without affecting your credit score.